In his October Tax Clinic, Malcolm Finney looks at taxing income on jointly owned property, transferring property between family members, personal tax allowances for non-residents, UK CGT when coming to the UK and the taxation of foreign pensions.

Tax on Rent Income

Many couples own rental properties; some are owned jointly and some are owned either by the husband or wife. In his query Tax on Rent Income, Ednmra owned the rental property 100% but as a higher rate taxpayer was keen to transfer ownership to his wife, a basic rate taxpayer, and wanted to know, “Do I need a special form, witnesses and/or anything else to effect the transfer, and do I lodge such details with my tax office, or local government, or anyone else?”

Contributor Tom7000 commented “You have to go see a solicitor and make a full conveyance over to her. There may or may not be stamp duty depending if there is a mortgage on it”.

Strictly speaking, it is not necessary to go to see a solicitor to effect such a change but stamp duty land tax (SDLT) may, surprisingly, be payable if a mortgage subsists against the property (as Tom7000 points out).  SDLT is not payable on gifts (unless a mortgage subsists and exceeds the current £175,000 threshold).

With respect to the question asked, there are basically two options to transfer ownership of the property from husband to wife. The first is for the husband to transfer both the legal and beneficial title to the wife. The second option is to simply transfer only the beneficial ownership by executing a declaration of trust (under which the husband retains the legal title but confirms that henceforth he holds the beneficial title as to 100% for his wife).

For tax purposes it is the beneficial (not legal) title that is important and thus for the wife to be subject to tax on the rental income she must own 100% of the beneficial title. Although under the second option the husband has retained the legal title the wife can at any time call for the legal title to be transferred to her.

The Land Registry’s website is very useful and the Land Registry is also helpful with regard to issues such as the matter raised by Ednmra.

Having effected any such transfer there is no requirement to notify HMRC but it is likely, due to the consequent changes on the respective tax returns, that questions will be raised by HMRC.  [ For further information on joint property ownership - and particularly as regards ownership between spouses or civil partners, see also Malcolm's excellent article The Principles and Implications of Joint Tenancy and Tenancy In Common for Spouses - Ed. ]

Transfer of Holiday Property

The question Transfer of Holiday Property by SueHill related to the tax consequences of the transfer of a UK holiday property owned by an elderly uncle. The questioner stated that the transfer was to enable the uncle  to be relieved of the costs of maintenance and associated bills.

The suggestion was that the property simply be gifted to the nephew.

Even if the property is gifted, a Capital Gains Tax (CGT) liability may arise as it is assumed that the disposal of the property is at its then market value (as contributor Peter D commented) as the nephew and uncle are “connected persons” for CGT purposes. The Principal Private Residence exemption is unavailable as the property had never been lived in by the uncle as a residence (which also means that any lettings relief is also unavailable).

It could be argued that as a CGT liability will arise on a gift, and given the limited resources of the uncle, that the nephew could purchase the property (for any amount; this would not need to be market value) as this would provide the uncle with extra financial resources without altering the above CGT consequences which will in any event arise on a gift. The purchase option would, however, unlike the gift option, possibly precipitate an SDLT charge (depending upon values) but the purchase price could be agreed at below the current SDLT threshold.

Although not raised in any of the answers, it may be more appropriate for the uncle to leave the property to the nephew in his will as this would avoid both the CGT and SDLT charges mentioned above. This would not preclude the nephew still funding any maintenance costs in the meantime.

Personal Allowances for non-Residents

Whilst personal allowances are available to all UK residents such allowances are, as a principle, not available to non-UK residents. However, not all non-UK residents believe this to be the case.

Isp54’s USA resident client in Personal Allowances for non-Residents lhad for some reason (unclear why) been granted a personal allowance when working in the UK (albeit as a non-UK resident). As contributor, Maths, commented this is incorrect as USA residents are not entitled under UK domestic tax law to such an allowance.

It is, however, the case that certain of the UK’s double tax treaties do in fact grant UK personal allowances to non-UK residents (e.g., the treaty with Canada). Perhaps, surprisingly, the treaty with the USA does not. Article 25 merely provides that the UK is under no obligation to grant USA residents UK personal allowances and in fact, as a consequence, does not do so.

There appears to be no logic as to when a double tax agreement may extend to non-UK residents personal allowances and thus it is important always to check the provisions of the particular agreement under review.

Returning from Abroad

The UK tax consequences for individuals who have been abroad for a period (following a prior period of UK residency) depend upon various factors. In the present case, however, the Roselynn had been told/advised in Returning from Abroad:

“I intend coming home again in March 2010 and stay through to Dec 2010 to try and build the business and have been told I could have a tax free period as I am returning from over 4 years outside the EU”.

I must confess to not having any idea where the “tax free period ....” idea came from. It may be that what is being suggested is that a return to the UK may not precipitate UK residency from the date of arrival back in the UK and thus by implication no UK tax consequences.

Certainly there is no such concept as a “tax free” period on a return to the UK from a period abroad. However, a return to the UK does not necessarily precipitate UK residency immediately. For example, an individual who does not intend to spend 183 days or more in any tax year or does not anticipate spending on average 91 days or more in any tax year averaged over a 4 tax year period, will not become UK resident from the date of arrival.

It is important if the above is to apply that on leaving the UK in the first instance links with the UK are severed and that indeed non-UK residency has occurred. Following a number of recent tax cases (e.g., Grace V HMRC (2008); Gaines-Cooper (2007); Barrett v HMRC (2008)) many individuals, who may physically leave the UK, may still nevertheless not actually lose their UK residency in which case, on returning to the UK, their UK residency simply continues.

The current questioner had in fact operated as a sole trader from within the UK and thus his/her UK residency is probably irrelevant in determining any UK tax liability on the trading profits since, generally, such profits will be taxable in the UK regardless of residence status. Although not commented upon by the various contributors, it is necessary to ascertain whether the terms of any relevant double tax agreement might be in point as to possibly precluding the UK HMRC from levying a UK tax charge under UK domestic law even on profits generated from within the UK.

Australian Pension Tax-Free in the UK?

Pensions are not an area commonly discussed on TaxationWeb. The issue raised by Tamarama - Australian Pension Tax-Free in UK? - queried the taxability or otherwise of an Australian source pension received in the UK by a UK resident.

It appears accepted by all those contributing that the pension would be subject to income tax in the UK but not Australia. This is in line with Article 17 of the Australia/UK double tax agreement which permits only the territory of residence of the individual to levy tax (in this case the UK). Most of the discussion amongst the various contributors, however, related to means by which this UK tax charge might be mitigated/removed.

It seems clear that the avoidance of any UK tax charge on the pension is not possible. However, a tax charge in the UK may be removed if the monies received from Australia were a lump sum payable under the pension scheme rules in Australia; this is provided for by ESC A10 as referred to in HMRC6 paragraph 10.9 (assuming no UK service under the relevant employment contract).

One contributor (tax me less!), however, whilst in principle agreeing with the above added that the lump sum might still be taxed in the UK on the grounds that it would constitute an “unauthorised payment charge”.

Article Added Sunday, 11 October 2009 | 4924 Hits

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